New Business Models to Usher in Bank Consolidation

The Indian Banking sector has witnessed remarkable growth since the economic liberalisation in the early 1990s. With the introduction of positive and liberal policies, rudimentary banking services have given way to a modern universal banking system. Many finance companies that have been successful in tapping the credit needs of rural India would reinvent themselves as small finance banks and help expand the country's banking population base. Banks are innovating their lending portfolios with tailor-made financial products, tweaking their business models and establishing tie-ups with fintechs to give a technological edge to their service commitments. Technology investments and customised solutions to meet diverse customer requirements are the new buzzwords in the modern banking landscape. Having said that, a broader economic turnaround is essential to help banks manage NPAs for the long-term orderly growth of the banking industry. As any other industry, the banking sector is also witnessing a 'dialectical growth' that evolves through contradictions (hypothesis) and solutions (synthesis). Any churning of growth of this kind has three Cs - competition, coexistence and consolidation - as its developmental stages.

On the competition front, Indian banks, like their foreign peers, are trying to combat manifold issues ranging from poor credit offtake to rising bad loans and the resultant dwindling profits. However, there's hope in the form of technological innovations that are bringing a paradigm change in the way the banking sector functions. One of the major visible impacts of this tech-driven innovation is various digitisation initiatives undertaken by banks. Almost all private sector banks as well as many large public sector banks are driving digitalisation by investing in easily adaptable technology. Banks are revising their business models and aligning their business offerings with the customer's digital behavior. Banks are expanding their digital imprints through apps, which have emerged as the preferred customer interface, resulting in simplified banking transactions.

The mushrooming of fintech companies, riding on the back of digitalisation and big data, pose the biggest competition for banks today. According to a report, as many as 6,000 fintech start-ups have popped up across the global financial landscape in the recent past. A McKinsey report says that venture capital and growth equity investment worth $23 billion has been pumped into these fintech companies during the past five years. This indicates the penchant for disruption within the banking space.

This has resulted in a radical revision of business models, causing sweeping changes in the payment ecosystem, lending space, portfolio management services, consumer finance, mortgages, SME lending and retail payments, and brick-and-mortar banks are now trying to imbibe and provide digital alternatives to meet customer expectations and business needs. The ubiquitous smartphone has emerged as the most critical component in the ongoing revolution, driven by innovation and disruption. First, it was the payment services, then came peer-to-peer lending, which was the most-talked about activity. And now, we are seeing robo-advisors giving algorithm-based portfolio management services! As a result, machine is taking over from humans, as trading is happening without traders. The very organisational structure under which banks have been operating all these decades is facing transformational challenges with the emergence of increasing third-party operations. Digital currency will soon supplant paper currencies. With more physical bank branches morphing into digital hubs or shuttering down the banking terrain will present a completely different picture, say, five years down the line.

Nearly 80 per cent of India's population lacks credit record - a stumbling block for seeking loans or other financial services. It is not just bad loan reporting that has to be real-time, even credit history of customers should be updated. The Reserve Bank of India (RBI) has made it mandatory for all credit information agencies to provide full credit reports free of cost on request by individuals, once in a calendar year starting January 1, 2017. This will make individuals responsible borrowers, as every transaction will leave a footprint which can be analysed and assessed for future business dealings. Some new players in the market use innovative approach to track credit records - studying online behavior and digital footprint of prospective customers - and real-time credit history disclosures of the entire population will be a reality soon with technological advances.

Digitisation has made branch-less and even account-less banking a reality, and has seen amalgamation and integration of various transaction consummation options. The launch of the Unified Payment Interface will make smartphones the preferred medium for payments till a new innovation displaces it.

Therefore, faced with intense competition, the onus is on banks to reinvent themselves, unlearn decades of learning and relearn many new things. Many have started seizing the opportunity and are spending heavily on business analytics to reinvigorate themselves. There is huge scope to tap the under-banked, because there is a social and economic necessity to bring them into the formal financial mould. The government is doing its part by implementing schemes like Jan Dhan Yojana; business is creating delivery platforms using human interaction with technological tools for customer interfaces. And the customer is finally emerging as the key deciding factor in this churning.

Once into competition, the next stage is either to disrupt their own models to defend their franchise and encounter competition with a better product or to peacefully co-exist through assimilation. We are now seeing this coexistence, with banks realistically re-evaluating their potential and joining hands with young start-ups to give better experience to customers. Thus the challenges are being transformed into opportunities to a great extent. Now the paradigm is of agility, healthy collaboration and co-existence, where the customer is the winner.

The third stage of this technology-driven evolution is consolidation, which is the synthesis in the dialectical process. Fortunately we are already witnessing some winds of the same. The pains of consolidation or mergers could be a bit acute initially, but it is only a prelude to a possible cure for the manifold sores that banks are grappling with now. They need to challenge their own business models, become more customer centric, and access longer-term, but larger, revenue pools. They have already learnt to coexist to a great extent. The next wave of growth should happen through consolidation, backed by technology and innovative strategies as the fleet of foot survives.The author is Managing Director and CEO, IndoStar Capital Finance